Unfair Contract Regime Extended to Small Business Contracts

17 October 2021

Businesses have less than a year to ensure terms in their small business contracts and their trade practices comply with requirements in the Fair Trading Amendment Act 2021 (Amendment Act).

The Amendment Act will be incorporated into the Fair Trading Act 1986 (FTA) and will come into force on 16 August 2022. It amends the FTA in three key ways:

  1. prohibiting unfair contract terms in small business contracts;
  2. prohibiting unconscionable conduct in trade; and
  3. strengthening the ability of consumers to require uninvited direct sellers to leave or not enter their property.

Unfair contract terms

The Amendment Act extends the existing protections preventing unfair contract terms in standard form consumer contracts to include small business contracts.

A small business contract is a contract between businesses to provide goods or services with an initial annual value of less than $250,000 (including GST).

An unfair contract term is a term that:

  1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

Unconscionable conduct

The Amendment Act prohibits unconscionable conduct in trade. While the term ‘unconscionable conduct’ is not defined in the Amendment Act, a list of factors is included that a court could give consideration to in determining whether conduct is ‘unconscionable’. These include:

  1. the relative bargaining power between the person engaging in the conduct and the person affected by the conduct;
  2. whether the parties acted in good faith;
  3. whether an affected person was able to understand any documents provided; and
  4. whether unfair pressure or undue influence was used.

Uninvited Direct Sellers

The Amendment Act also strengthens the ability of consumers to require a door-to-door salesperson to leave or not enter their property, including through the use of written signs such as ‘Do Not Knock’.

Once an uninvited direct seller is directed to leave, or becomes aware of the written notice, the seller must leave the premises as soon as possible. The Amendment Act prohibits an uninvited direct seller from entering or re-entering a property they have been directed to leave within two years after such direction.

What changes may need to be made to small business contracts?

The unfair contract terms regime has been in place for consumer contracts for some time and there is guidance as to what amounts to an unfair contract term. Examples of terms that could raise issues are:

  1. A unilateral right for one party to increase prices or vary terms.
  2. Automatic rollover and renewal clauses.
  3. Terms allowing a party to terminate the contract for breaches (including minor breaches), without giving the other party an opportunity to remedy.
  4. Broad limitation of liability or indemnity terms.
  5. Early termination charges.

In light of the proposed amendments, businesses using standard form contracts in trade should consider whether their current contracts may be considered unfair and whether they need updating. If such terms exists, there is a risk those cannot be enforced without penalty.

There is also a possibility that the Commerce Commission commences proceedings if it perceives a contracting party’s terms to be unfair. Helpfully, the Commerce Commission is expected to release guidance on its website covering unconscionable conduct and what unfair terms might look like.

If you would like any further information on the proposed changes, or what it may mean for your business, please feel free to contact us.

Chris Steenstra and Tom Corkill and Angela Scarlett are part of our Corporate & Commercial team at Norris Ward McKinnon.